Reynolds Securities, Inc. v. Underwriters Bank & Trust Co., 44 N.Y.2d 568 (1978)
When a default judgment is entered on liability, the defaulting party, at the damages inquest, may offer evidence intrinsic to the underlying transactions to mitigate damages, but cannot introduce evidence to defeat the cause of action or assert setoffs from separate transactions.
Summary
Reynolds Securities sued Underwriters Bank for goods delivered and allegedly not paid for. Underwriters Bank failed to answer interrogatories, leading to a default judgment on liability. At the damages trial, the court limited evidence to the reasonable value of the goods, precluding evidence of payments and advertising credits claimed by Underwriters Bank. The New York Court of Appeals reversed, holding that while a defaulting party admits liability, they are entitled to present evidence intrinsic to the transactions at issue to mitigate damages. The court emphasized that the inquiry should determine the plaintiff’s actual damages, not permit a windfall due to the default.
Facts
Reynolds Securities commenced an action against Underwriters Bank, alleging non-payment for delivered merchandise totaling $90,161.30. Underwriters Bank claimed payment by check, advertising credits, and returned merchandise. Reynolds served interrogatories, which Underwriters Bank failed to answer, leading to a motion to strike the answer and enter judgment. The court granted the motion and entered judgment for the full amount claimed.
Procedural History
The Supreme Court initially granted Reynolds Securities’ motion for a default judgment due to Underwriters Bank’s failure to answer interrogatories. Underwriters Bank’s motion to vacate was granted only as to the amount of damages, restricting the trial to evidence of reasonable value. The Supreme Court reduced the judgment to $62,053.95 after Reynolds conceded a resale profit. The Appellate Division affirmed the amended judgment. The New York Court of Appeals then reversed the Appellate Division’s order.
Issue(s)
Whether, at a trial to determine damages after a default judgment establishing liability, a defendant may introduce evidence of payments or credits intrinsic to the transactions underlying the plaintiff’s cause of action to mitigate the amount of damages owed.
Holding
Yes, because while a defaulting party admits all traversable allegations including liability, they do not admit the plaintiff’s conclusion as to damages, and are entitled to a full opportunity to present evidence intrinsic to the underlying transactions which would serve to mitigate or reduce the amount of those damages.
Court’s Reasoning
The Court of Appeals held that the limitation on evidence at the damages trial was erroneous. Citing McClelland v. Climax Hosiery Mills, the court clarified that a default admits traversable allegations but not conclusions on damages. Therefore, the defaulting party retains the right to offer evidence “in mitigation of damages.” The court distinguished between evidence that defeats the cause of action (which is inadmissible) and evidence intrinsic to the transactions that affects the real damages (which is admissible). The court reasoned: “Unless the damages sought in an action are for a ‘sum certain or for a sum which can by computation be made certain’ (CPLR 3215, subd [a]), judgment against a defaulting party may be entered only upon application to the court along with notice to the defaulting party and ‘a full opportunity to cross-examine witnesses, give testimony and offer proof in mitigation of damages’.” The Court explicitly stated, “[A defaulting defendant] will not be allowed to introduce evidence tending to defeat the plaintiff’s cause of action. Nor is evidence admissible concerning setoffs arising or existing separate and distinct from the transactions out of which the plaintiff’s cause of action arises. Evidence will be allowed, however, involving circumstances intrinsic to the transactions at issue that, if proven, will be determinative of the plaintiff’s real damages, which cannot be established by the mere fact of the defendant’s default.” The court found that Underwriters Bank’s evidence of payments and advertising credits directly related to the transactions and should have been admitted. The degree of fault in defaulting was irrelevant to determining Reynolds Securities’ actual damages.